Market segmentation – how to get a bigger piece of the pie

10th May, 2018

Market segmentation is the dividing of your market into meaningful sub-groups to better identify, target and position your offerings to those more likely to be attracted to our value proposition.  In this guide, the first in our new series on attracting the right customers, we show how segmentation analysis goes towards developing an effective marketing strategy.  With the increasing sophistication of websites dynamically responding to user behavioural flows; it’s easy to lose sight that our business success is based on how well we address our customers’ needs and wants.  However, no organisation can satisfy all possible all customers – and so segmentation is the first step in deciding which customers to focus your efforts.

What is a market segment?

Before racing into showing how to go about your market segmentation analysis, let’s take a mo’ to consider what is a market segment.  Understanding this will help you make better choices later, as you’ll see there are ‘many ways to skin a cat’.   There are many definitions available but we favour:  A market segment is a group within a market that share a set of common characteristics, behaviours (referred to as segmentation variables), which are different from other groups within the same market. Consider for example: retail Vs trade customers.  

You many be wondering what’s the difference between market segmentation and customer segmentation?  Glad you asked.  To a certain extent, not a lot – likely it has more to do with your starting point.  If you are starting from the market looking inwards towards the organisation (as in our article: Business Opportunities – a guide to choosing winners) then we would refer to this as market segmentation.  Customer segmentation on the other hand is typically a retrospective analysis of customer data, with the aim of identifying segments (e.g. what industries do our customers come from?)  In either case you are looking to know your customers better, which has benefits in terms of better alignment of resources, resulting in improved profitability.

How does this relate to Internet marketing?

A lot.  Many marketers have mistaken de-massification trends within eCommerce as removing the need for segmentation; for them, personas are all the rage.  We say personas and segmentation are related, but not a one-for-one replacement.  Let’s unpack that first sentence to see where the confusion is creeping in. 

De-massification is essentially the recognition by proactive companies that customers can be turned off by one-size-fits-all offerings.  Importantly, many of these same customers are willing to pay more for solutions that more closely match their needs.  Aided by technology the size of segments can in theory approach that of 1 – the individual customer.  We think customisation and flexibility are desirable attributes however, companies need to start with initial target segment(s) – see box.

 
 
 
 
Personas

The content management system (CMS) provider Hubspot defines a persona as ‘a semi-fictional representation of your ideal customer based onmarket research and real data about your existing customers. When creating your buyer persona(s), consider including customer demographics, behavior patterns, motivations, and goals.’  They could have said – when creating buyer persona, best first do market segmentation analysis.

For us personas are a powerful way of developing a common understanding within your organisation of how different groups will interact with you throughout their customer journey.  This is particularly relevant in digital marketing where you can tailor the communication channels (e.g. email marketing, organic search) based on the characteristics of each persona, to attract them to your website.  Once on your site, your content management system can dynamically alter the images, choices, etc presented based on the derived persona of the user to improve conversion rates.

Deciding what to segment on

Breaking a market into meaningful segments is the key to success.  Remember we are ultimately looking for groups that will respond to our marketing mix in a similar way, so our choice of segmentation variables is going to be key.

There are a multitude of ways to segment a market (take a look at the list), but we are only interested in those that better help us understand our (potential and existing) customers.  In general better segmentation shares the following characteristics:

  • Significant differences between segments – if all customers derive the same benefit from a product, then there’s little point in segmenting;
  • Similar characteristics, behaviours within a segment – remember, our goal is to be able to market to them.
  • Measurable – you need to not only identify the characteristics but also be reasonably able to measure them (e.g. number of businesses with incomes between $2m-10m on Sydney’s North Shore;)
  • Substantial – the saying  goes “is there a segment in this market and a market in this segment?” – i.e. your segment sizes need to be large enough to make it worthwhile targeting them.
  • Actionable – ask yourself “so-what?” : What difference will it make tailoring your marketing mix for these segments? Is the effort/cost worth it? 

Note:  Although technology now enables us to chop our markets into smaller and smaller groups (i.e. towards segments of size = one) for practical purposes, group size should only be reduced to where there are still meaningful differences across the groups for the same segmentation variable.

Bases of segmentation

The key bases of market segmentation are listed below.  We also encourage you to check out our more expansive list, with example applications for both the consumer and business markets.

  • Geographic segmentation – nations, states, regions, etc
  • Demographic segmentation – age, gender, family size, etc
  • Psychographic segmentation – social class, lifestyle and/or personality
  • Behavioural segmentation – knowledge, attitude, use or response to a product
Business market segmentation

Our experience is that many business marketers automatically first segment their markets along demographic lines (e.g. targeting the mining industry).  Whilst there is a certain logic to this, we believe such an approach can be self-limiting.  In the business segmentation example we illustrate an alternate approach by considering benefits-sought as the primary variable.

Don’t forget your business purchaser is a person as well.  Seems obvious but many smaller firms attempting to sell to enterprises tend to lose sight of the fact that certainly in the early stages of the sales cycle, the ‘influencer’ and even the ‘decision-maker’ will resemble a consumer shopper – particularly in how they utilise the Internet scanning for options.

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Still to come:

  • Customer segmentation example
  • Business segmentation example
  • Customer segmentation variable list
  • Business segmentation variable list

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